Italy Election Impasse Negative for Credit Rating, Moody’s Says

Italy’s inconclusive elections raise the chance for prolonged political uncertainty, putting the country’s sovereign credit rating at risk for a downgrade, Moody’s Investors Service said.

The hung parliament is credit negative because it could lead to new elections and even a second vote might not resolve the gridlock, Moody’s said in a report dated yesterday.

“Instead of increasing visibility on the country’s political direction, Italy’s recent elections raised the risk that the structural reform momentum achieved under the government of Mario Monti will stall, if not come to a complete standstill,” Moody’s analysts including Frankfurt-based Dietmar Hornung wrote in the report.

Turmoil in Italy, the region’s third-largest economy and biggest bond market, risks spilling over into the currency bloc’s weaker sovereigns including Portugal and Spain, “potentially reigniting the euro area debt crisis.”

Pre-election favorite and Democratic Party leader Pier Luigi Bersani won the lower house by less than a half a percentage point, while ex-Premier Silvio Berlusconi gained a blocking minority in the Senate after the Feb. 24-25 vote.

Berlusconi and former comedian Beppe Grillo both campaigned against austerity measures implemented by Prime Minister Monti and won about 55 percent of the popular vote.

Yield Surge

Italian 10-year bond yields climbed 41 basis points yesterday to 4.88 percent, the biggest advance in 14 months. Italy seeks to sell as much as 4 billion euros ($5.2 billion) of a new 10-year bond today, along with 2.5 billion euros of a 5-year benchmark note.

The 10-year rate reached 6.71 percent in July as concern of contagion in Europe’s debt markets spread, nearing the 7 percent level that prompted Greece, Ireland and Portugal to seek international rescues.

Moody’s rates Italian long-term debt at Baa2, two levels above junk status. Standard & Poor’s rates it BBB+, three levels above non-investment grade level. Fitch Ratings grades it A-, four levels above junk.

Yields on sovereign securities moved in the opposite direction from what ratings suggested in 53 percent of 32 upgrades, downgrades and changes in credit outlook last year, according to data compiled by Bloomberg published in December. That’s worse than the longer-term average of 47 percent, based on more than 300 changes since 1974. Investors ignored 56 percent of Moody’s rating and outlook changes and 50 percent of those by S&P in 2012.

Moody’s said it would consider downgrading Italy if there was a material deterioration in the nation’s economic prospects or reform efforts. Difficulty in accessing public debt markets and the necessity of external assistance could lead to “substantially lower rating levels,” according to the report.

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